Coins Remain a Bright Spot for Gold (Jan 2014)

Sales of gold coins are booming even as the metal’s price is falling, a testament to gold’s continued appeal for small investors and collectors despite its first bear market in more than a decade.

The heightened appetite for physical gold is a rare bright spot in a market that saw hedge funds and other large investors head for the exits last year. Gold futures prices tumbled 28% in 2013, their worst performance since 1981.

But at mints and coin shops around the world, gold continued flying off the shelves.

Demand for gold coins shot up 63% to 241.6 metric tons in the first three quarters of 2013, according to the latest figures available from the World Gold Council.

Sales of Gold Maple Leaf coins by the Royal Canadian Mint surged 82.5% to 876,000 ounces in the first three quarters of 2013 from the same period of 2012. The Perth Mint, Australia’s national coin and bar producer, saw sales rise 41% to 754,635 ounces last year, while the U.S. Mint sold 14% more American Eagle gold coins than it did in 2012, along with a record amount of silver coins.

Coin buyers tend to be small investors who view gold as an insurance policy against financial shocks, said Bart Melek, a senior commodity strategist with TD Securities Inc.

Because these investors intend to hold onto their gold for years or decades, many see the recent drop as an opportunity to buy more at a cheaper price, he added.

“They’re not under any pressure to get a yield or a return in a year,” Mr. Melek said.

Gold-market participants of all stripes keep close tabs on coin sales, which make up about 10% of global demand for the metal, according to the World Gold Council.

Because 90% of gold use comes from jewelry-making and investment, it is up to buyers ranging from Indian brides to German coin collectors and U.S. pension funds to absorb the roughly 4,500 metric tons produced by miners each year.

Many traders and analysts believe a flurry of buying by Asian coin and jewelry dealers, for example, helped halt a two-day, 13% slide in the gold-futures market last April.

Some think the continued strength of physical gold buying will prevent prices from falling much further, as it becomes clear that a core group of investors is sticking with the market, said Jeffrey Christian, managing partner of research consultancy CPM Group LLC in New York.

“The gold price is largely determined by physical supply and demand, with investment demand being the single most important determinant for gold prices,” Mr. Christian said.

Gold prices tumbled last year amid speculation that the Federal Reserve would soon wind down its stimulus efforts, which had weakened the dollar, heightened inflation fears and drove many investors into gold. The Fed said on Dec. 18 that it would begin reducing bond purchases in January. A day later, gold futures hit a more-than three-year low of $1,195 an ounce.

On Thursday, futures ended up 1.9% at $1,225 an ounce. Prices are still down 35% from their record high of $1,888.70 hit in August 2011. Since April, gold has been in a bear market, defined as a drop of 20% or more from a recent high. Last year, gold posted its first annual loss since 2000. Many analysts believe the dollar, which rallied against many currencies on Thursday, is likely to rise more, further denting the case for owning gold.

But concerns about inflation remain vital with gold coin buyers like 60-year old Jimmy McClintock, of Rockwall, Texas, who added a gold American Buffalo coin last week to a collection he has been building since the 1990s.

“It’s obvious to me that at some point our dollar will see a downturn in its value,” said Mr. McClintock, who runs a contract post office. “Gold is just a good comfort, it’s a commodity that anybody in the world knows and you don’t need to be an expert to understand.”

Michael Barber, who owns the Arcade Coin & Stamp Galleries in Toronto, said he scooped up “quite a few” 100-year old Canadian coins offered by the Royal Canadian Mint after detecting a “surprising” level of interest from buyers looking to hold them as an investment.

Mr. Barber said collectors’ coins typically aren’t a good investment because too many are produced and mints tend to charge above the market price for gold. But he said those factors haven’t deterred buyers so far.

“People buy them because of the marketing,” he said. “As long as they’re promoting it, there is a lot of hype and interest.”

Still, the importance of gold coins has been eclipsed in recent years by the rapid growth of exchange-traded funds, some analysts say.

ETFs, such as the SPDR Gold Trust, allow institutional investors to quickly buy or sell large gold positions without having to handle the metal themselves. Total gold ETF holdings fell by 27.94 million troy ounces last year to 56.67 million ounces, according to TD Securities.

Hedge funds can also borrow money to accumulate futures contracts or options, while coin buyers tend to pay cash, limiting the amount they can buy, said Mr. Melek, the TD Securities analyst.

Unlike hedge funds, who may leave when prices fall, many coin buyers are in for the long haul.

After giving birth to twin girls two years ago, Nelam Molnar, 30, an attorney and real estate broker in Los Angeles, decided she would buy two gold coins on their birthday each year until her girls turn 21. She said she has faith that the coins will be worth more in 20 years, recalling how her parents bought gold for $800 an ounce when she was in high school.

“Most people who buy physical gold aren’t doing it for the same reason you’d purchase a stock,” said Mike Getlin, vice president with Merit Financial, a bullion and coin dealership in Santa Monica, Calif. “They tend to have a much longer investment horizon. They tend to hold onto them forever and pride of ownership is a huge factor in that.”

A similar trend has occurred in the silver market, where coin sales by the U.S. Mint rocketed to a record high 42.675 million troy ounces in 2013 from a year earlier even as prices slumped 36% to $19.339 a troy ounce.